AudioCables Inc is currently manufacturing an adapter that h

AudioCables, Inc., is currently manufacturing an adapter that has a variable cost of $0.50 per unit and a selling price of $1.40 per unit. Fixed costs are $14,000. Current sales volume is 30,000 units. The firm can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $6,000. Variable costs would increase to $0.75, but sales volume should jump to 50,000 units due to a higher-quality product.

a. What is the current profit and proposed profit of the sales of AudioCables? (Negative amounts should be indicated by a minus sign.)

b. Should AudioCables buy the new equipment? Yes No There is insufficient information provided to answer this question

Solution

a) Currently the fixed cost (FC) = $14000

Variable cost (VC) = $0.50

Selling price (SP) = $1.40 per unit

Sales volume (Q) = 30000 units

Current profit = Q(SP - VC) - FC

= 30000(1.40-0.50) - 14000

= (30000 x 0.90) - 14000

= 27000 - 14000

= $13000

With the addition of new piece of equipment,

Fixed cost (FC) = $14000+$6000 = $20000

Variable cost (VC) = $0.75

Selling price (SP) = $1.40

Sales volume (Q) = 50000 units

Proposed profit = Q(SP - VC) - FC

= 50000(1.40-0.75) - 20000

= (50000 x 0.65) - 20000

= 32500 - 20000

= $12500

b) Audio cables should not buy the new equipment because it will yield a lower profit.